But the other guy said...

It's no secret that accountants don't like it when clients tell them about advice they've heard at the pub or club or heard about from the paper or TV. Such conversations include words to the effect of:

• "Why didn't you tell me that I could...?" or
• "Is it true, do you think I could do that?"

Your accountant can only respond in one of 4 ways. He/she can either:

• Agree that it's good advice (this is rare);
• Offer to think about whether it's possible in your precise circumstances;
• Disagree with the advice as it does not take account of your precise circumsatances; or
• Does not understand the advice - for any one of a number of reasons (including the possibility that you haven't reemmbered it perfectly)

The second of these responses is the best one of course - as long as you and the accountant agree who is bearing the cost of the research. There's generally a limit as to how many new ideas an accountant will research for free.

Here's my tip:
Your accountant doesn't want to lose you as a client. He/she will generally research the odd thing without asking a client to pay for the time - especially if the idea is worthy of more widespread application. On the other hand - you won't ingratiate yourself if you expect your accountant to research another idea each week without charging you something for the time and effort.

Whose money is it anyway?

Do you ever send your notice of coding to your accountant to check? This Notice is the form issued by the taxman to tell employers how much PAYE tax to take off when they pay wages and salaries. The italicised note below gives a little more background for those readers who want it.

Depending on your circumstances the coding might be right or wrong OR it might not be possible to say one way or another. This is because if your tax affairs are even just a little complicated it's not possible to be certain exactly what tax code would be the right one.

If you ask your accountant to check the notice you need to know if he/she is going to charge extra for this. What you want to avoid is paying extra fees for your accountant to get the coding changed unless the change has a positive cashflow impact.

Whether or not the coding notice is changed what is your reaction at the end of the year if your accountant tells you that you're going to get a tax refund? Jubilation? Relief? Ecstasy?

Before you credit your accountant with being an aboslute whizz, find out WHY you've got a refund. If it's because your coding notice was wrong the refund may not be such great news.
The refund is just paying back to you the extra tax you paid each month through PAYE. Did anyone give you the option of getting a new coding notice and paying less tax each month?
The tax refund is YOUR money being paid back to you.

All employees (including company directors) get Notices of Coding and the taxman admits that a fair percentage are wrong each year. This means that either too much or too little tax is deducted from salaries and then refunded or collected when the tax return is filed. In some cases an underpayment can be collected by making an adjustment to the next year's Notice of coding.

Who is the client?

Today's blog is only relevant to you if you operate your business through a limited company.

If this is the case then you are probably aware that you and the company have to be treated as separate 'legal entities'. Thus you cannot dip into the company's bank account to spend money on personal expenses. Equally your accountant has to keep in mind when he/she is advising you personally and when he/she is advising your company.

Now many accountants will try to avoid the complexities that this obligation imposes on them. Your accountant knows that you probably have a hard time understanding that your company is a separate 'legal entity'. Why should he/she make life any harder by reminding you of this complication all the time?

There are actually a number of reasons why your accountant should do exactly this. Ideally they will aim to keep things as simple as possible but they should not protect you from the distinction absolutely. If they try to do this they are not doing you any favours. They are also not operating in a very professional way at all.

So - if you do operate through a limited company - have a think for a moment. Do you know when your accountant is advising you and when it is the company that is being advised? Are some letters addressed to you personally and some to the company? Do your accountants' bills show how much of the fee relates to dealing with your personal tax issues and how much relates to the company?

If the answer to any of these questions is 'no' then your accountant may well be operating in an unprofessional manner. Does that inspire you with confidence? If not, then perhaps you need to have a word to clarify things. You can then decide whether or not to remain with that accountant or to try to find a new one.

Does the answer warrant the question?

I have commented in a previous blog that accountants don't know all the answers. Although many questions you might have will be commonplace, it is equally possible that your accountant has not encountered your precise situation before.

During my many years in practice I often encountered situations where the cost to a client of resolving a problem could have been greater than the tax at stake.

Accountants need to adopt a commercial approach so that they don't charge more in fees than the amount of tax they are trying to save their client.

A great question to ask your accountant is "have you ever come across that before?"

If your accountant says 'yes' you will probably find that it will not cost much to give you the answer to your question. If the answer is 'no' - you can ask how much it's going to cost to find the answer and to give you advice.

If your accountant says 'no' too often, perhaps you should find one who knows more about the sorts of things that are relevent to your situation.

Here's a related tip:
Whenever you ask your accountant a question, make sure you find out how much tax is at stake and how much it will cost to get an answer. If you get the impression that your accountant doesn't relate one to the other, maybe you should find a new accountant.

Your accountant may be shy

Your accountant (assuming he or she is any good) can be a fabulous asset to your business. A great resource of valuable business advice.

If you chose an accountant with relevant experience of other similar businesses, he/she should be able and willing to help you avoid the mistakes they saw other clients make. They should also be able to point you in the right direction and help guide your business - just like your bank manager may have offered to do. You would always do well to ensure that any business advice you follow is independent and objective. Accountants rarely have ulterior motives beyond wanting to help their clients grow.

If your accountant is one of the shy ones you may need to coax out some of the good business advice that he/she has accumulated over the years. The more effort you put into the relationship the more value you will get out of it.

Getting definitive advice from your accountant

I have explained previously why there are many occasions when accountants cannot confidently give clients definitive advice.

Accountants who attempt to give definitive advice on matters where there are legitimate differing views generally fall into one of two categories. Either they are:

1. Minimalistic: They encourage you to keep your claims to a minimum - so as to avoid any serious prospect of HMRC successfully challenging your claims; or
2. Maternalistic: They misunderstand how the tax system works and base their definitive advice on what they 'have got away with' when advising other clients.

In my view the Maternalistic accountants are dangerous and best avoided.

Equally the Minimalistic accountants are not giving you the chance to decide whether you want to make the maximum claims for tax relief that you could. Thus you are paying more tax than would need to if you were prepared to risk a challenge by HMRC at some future time.

What should really happen is your accountant should find out what sort of advice you would prefer. And if, like most people, your answer is that you just want to pay the minimum amount of tax possible in accordance with the law, your accountant should explain that you still need to make a choice. It's a choice available to everyone in our tax club (the UK's self assessment tax system). Either:

• You keep your claims for tax relief to a minimum so as to avoid any prospect of HMRC successfully challenging anything; or
• You 'try it on' and claim the maximum you can in accordance with your accountant's views and advice - whilst risking the prospect of a successful HMRC challenge at some future date.

Does your accountant know which option you would prefer?

Few absolutes in our tax system

In a recent blog I mentioned that all too often accountants cannot give definitive answers to certain questions eg: exactly what can be claimed as a deduction for use of home as office.

This often comes as a surprise to clients especially as most clients don't want advice that is hedged around with ifs and buts and maybes.

Sadly though there are dozens of examples across the tax system whereby there are no absolute hard and fast rules that accountants can rely on. In some cases HMRC have explained how they intend to apply the rules in a way that most accountants do not accept is justified by the tax laws. In other cases the laws are capable of more than one legitimate interpretation. As a result accountants are often forced to make a choice. To be honest (and explain that there are no hard and fast rules) or to attempt to give definitive advice.

I will comment further along these lines in my next blog.

Accountants have ears

Professionally qualified accountants are invariably honest. They have to comply with:

• their professional bodies' code of ethics;
• a guide to professional conduct; and
• the anti-money laundering (AML) rules.

Amongst many other onerous obligations these AML rules oblige accountants to report various things to the National Criminal Intelligence Service.

So, for example, your accountant is obliged by law to make 'Money laundering' reports if he/she has reason to believe that you have deliberately falsified claims for tax relief or refused to disclose all of your taxable income.

If you think you may have done something wrong in the past, your accountant will try to convince you to put things straight. If you don't agree then he/she will be obliged to make a report. Accountants who are found to have omitted to do this can face stiff fines or a prison sentence.

The Government is currently considering whether to ask HMRC (Revenue & Customs - the taxman) to check up on unqualified accountants to ensure that they too are complying with the AML rules.

Pity the accountant or the client?

In response to my request to tell me what they thought of their accountant someone told me the following story recently.

He is self employed and only has one simple business. By his own admission he cannot be bothered to sort out his papers etc until just before the deadline; he still expects his accountant to complete the tax return and advise him how much tax to pay on time.

The client passed the necessary information to his accountant, who he has been using for years, on 30 January this year. On 31st January the accountant had done all he could but before filing the tax return he spent 2 hours with the client resolving queries and finalising his calculation of the tax payable that day.

Afterwards the client was furious as so far as he was concerned the accountant had not saved him any tax at all.

Initially I felt sorry for the accountant. He had put himself out to accommodate this client at the last minute just before the filing deadline for filing personal tax returns. He had spent 2 hours with the client and had filed the tax return on time. This was a long standing client who could not be persuaded to supply the necessary information earlier in the year. The client was clearly being ungrateful.

Then I looked at the situation through the eyes of the client who had told me the story.

What sort of expectations had the accountant established in his mind? I suspect he was operating on auto-pilot at the end of January. He may well have helped the client to reduce his tax bills but had forgotten to highlight this to the client who just saw the final figure of tax payable.

Maybe the accountant hadn't issued any reminders that made clear clients would get a lower level of service if they left things to the last minute.

What had gone on during the 2 hour meeting on 31 January? Few accountants can afford to make this level of time available to last minute clients. This client felt hard done by because he didn't feel he received any advice during the meeting. More fool the accountant for not making his advice more obvious - if he gave any. Perception is reality. If the client didn't perceive he had received a good service and valuable advice - the accountant is probably at fault.

If this blog contained advice for accountants I would stress that they should always highlight for clients the tax that would have been payable were it not for their input and advice and then to compare this with the final amount payable. That would make the clients feel better and make the accountants' fees seem like good value. Sadly this comparison is not one that most accountants can easily compute.

As a client however you can ask for the figures and for a reconciliation showing the tax saving of each piece of advice - if you want it. In my experience most clients don't want this - they would prefer to just pay lower fees as long as they have more general impression that their accountant is saving them money. A decent accountant will make this clear to you.

Remember - you are the client; you can ask for whatever you want (as long as you're prepared to pay for it). If you want something different the next year, tell your accountant but don't leave it until the last minute. If he/she has already done the work they may insist you pay for it.

Five typical secrets

Despite the title of this blog and all of the postings I have made to date, this is the first time I have just listed five typical secrets:

1. Accountants don't know all the answers - even when they pretend that they do;
2. They will promise to give you good business advice but much as they might mean this when they say it, they never have the time;
3. When they promise 'no fee surprises' it's more of a hope than because they have a reliable system to prevent it happening;
4. You know how helpful it would be to your business for your accountant to introduce you to prospective clients? Your accountant would love you to recommend him/her too but doesn't know how to ask you without sounding desperate;
5. Unless the annual fees you pay put you in the top 20% of your accountant's clients, you will not get priority treatment.
   

Of course not all accountants share these five secrets. But quite a lot of them do. If you've found one who doesn't, you've done well.

How to make sure you get good advice

Tell your accountant everything. Everything. Everything.

This isn't poker, show your whole hand. Treat them like your therapist. They can then help you plan for your future better. If you're ever tempted to lie about your income, don't. Instead, hire an advisor (ideally different to your regular accountant) and ask them lots of "hypothetical" questions. If you don't walk away happy, hire another.

You'll quickly find out that you don't need to lie to get your taxes down, you just need to ask the right "what if?" questions

Feedback is the breakfast of champions

If a client doesn't give me any feedback - I don't know what they think. That's my attitude but it's not a very common perception.

I've long valued receiving feedback, be it positive or negative. I work on the principle that until and unless a client says positive things about me or my service, that they may not be happy. So receiving positive testimonials is a real boost.

My research tells me that most people are not delighted with the service they get from their accountant.

If that sounds like you I'll let you into another secret:
If you haven't said anything I'll bet your accountant assumes they are doing a good job. Not an okay job but a good job. Possibly even a great job, especially if you've passed on his/her details to a friend. You may have said something like: "my accountant's alright, nothing special but not too pricey." Getting a referral will have convinced your accountant that he/she is doing a great job and that everything is going well. That's right. Your accountant thinks that everything is fine if clients are not complaining.

My own approach has always been to take the contrary view. If a client tells me that he/she is very pleased then I know I've done a good job. If clients aren't saying anything there could be a problem. Most accountants however will assume that all is fine unless you tell them that it isn't.

If your attitude is the same as the majority of people who think their accountant is just 'ok', tell your accountant. Help them to raise their game and to give you a better service. You're paying them; you're entitled to it.

GP or consultancy services?

In an earlier blog I explained how most accountants are like GPs. When a client needs advice that is outside the accountant's comfort zone they will often seek input and advice elsewhere.

The options tend to include:

• The biggest firms of accountants - some of which have dedicated support services for smaller firms of accountants and tax advisers;
• Large specialist providers of tax support for other accountants and tax advisers;
• One man bands - individuals (often local to your accountant) who provide a specialist support service;
• Telephone help lines - often provided by the same organisations that offer fee protection insurance;
• Professional institutes and training bodies that provide support to smaller firms of accountants and tax advisers;
• Specialist websites and magazines where experts will answer questions posed by accountants and tax advisers;

NB: In my experience some accountants do not admit that they have sought third-party input. They seem to think there is some shame in not knowing everything.

I think this is dangerous. Indeed there is clear advice in the standard Guide to professional Conduct that applies to all professionals giving tax advice. It recommends that no one should take on work or advice on any matter unless they have adequate experience. If in doubt, they should seek input from elsewhere. This is especially true when a client is the subject of a tax investigation or requires advice on a less common subject such as inheritance tax, stamp duty land tax or VAT.

Does your accountant know everything? Are they a GP? When you need a specialist opinion can you get one? (Bear in mind you'll have to pay for it and it will cost more than your GP accountant would have charged - in the same way as medical consultants are more expensive than your local GP)

Use of home as office

I'm often surprised when I hear from people that their accountant hasn't talked to them about the tax relief they can claim for 'use of home as office'.

Let's clear up a few misconceptions:

• If you run your business from home you CAN claim a deduction from your taxable income;
• The size of the deduction should depend on how much you use your home for business purposes;
  
• There will rarely, if ever, be any capital gains tax consequences of claiming this deduction;
• Different rules apply if you run your business through a Limited company;

The calculation of the claim
There are essentially two methods of calculation – the simple method (which I prefer) and a “detailed calculation” method which is more appropriate for people who spend a great deal of time working from home - especially if the room(s) used for business purposes are more than 20% of the rooms in the house..

The simple method, being a rough and ready calculation, merely uses a weekly flat rate amount of, for example, £10 per week and multiplies this by the number of weeks in the year.

A detailed calculation would take each main room in the house into account – excluding bathrooms and kitchen but including the hall, stairs and landing as one room. You would then calculate all the home running costs and the relevant fraction or percentage applied to the total. Relevant costs would include council tax, gas, electricity, water rates, insurance (building and contents) and cleaning. Mortgage interest would not be included however.

What does your accountant say?
If your accountant knows that your business is based at home, they should have raised this issue with you. Hopefully they have given you good advice so as to keep your taxes to a minimum.

You might well hope that your accountant would give you definitive advice as to:

• which expenses you can claim and which you can't claim for tax relief;
• how much of each type of expense you can claim;
• what the taxman will allow.

If only accountants could do that with some certainty. This often isn't possible for reasons that I'll explain in a future blog.

Partner billing rates

In an earlier blog I explained that in firms with more than one or two partners their earnings are likely to be directly affected by two factors. One of these is their level of chargeable time and I explained more about this in yesterday's blog. The other key factor is the aggregate level of the partner's billings.

This is the reason why partners in larger firms regularly try to pass work down the chain to managers and to more junior staff. The more work that is done by other people the greater will be the overall fees billed by the partner.

This is the power of leverage. If your accountant (let's call him Bill) does everything himself there is no leverage. If some work is done by a member of staff then Bill will charge his clients more than he pays the staff for their work. He makes a profit on the difference. If he has 2 staff he makes even more profit and so on.

Now it's also true that the staff may not be sufficiently experienced or competent to do the work without supervision. Where the work is not very complex such that junior staff can do it themselves your accountancy fees may be lower than they would be if Bill did everything himself.

So where am I heading with this?
If your affairs are very simple and you have chosen a specific accountant or firm of accountants, who is doing the work? Is it the person you chose or is it someone more junior? If the partner does very little for you other than sign letters, you are probably paying higher rates than you need to pay. Equally if the person you chose is 'only' a manager, this might suggest that you don't need a partner's input unless he/she can convince you of the added value that you will get from their input. If no one has addressed this yet, ask them to do so.